|
Clouds building over energy income trusts Analyst: Trusts too shaky for those seeking stable income over long period; Alberta government plans tighter protection for investors Gary Park Petroleum News Calgary Correspondent
Energy income trusts may be entering an uncertain period in Canada, accompanied by warnings from an analyst with Edward Jones, a leading investment and financial services firm.
The concerns are reflected in the unwillingness by directors of Penn West Petroleum to bend to shareholder pressure at the company’s annual meeting on Aug. 20 and convert their conventional E&P company, the fifth largest independent producer in Canada, into a possible C$4 billion trust.
Over the past decade there has been an explosion of oil and gas trusts from five in 1995 with a market value of about C$600 million to 28 today with a market cap of about C$30 billion.
Although there is no clear evidence yet that the trust sector is stretched to the limit, Kate Warne, a Canadian market strategist with Edward Jones, said her firm has no trusts on its list of recommended shares to buy.
She told the Edmonton Journal that trusts — despite some suggestions that they are as reliable as bonds — are too risky for investors who need stable income streams for long periods, because cash payouts to unit holders are bound to suffer when oil and natural gas prices drop.
Edward Jones is more enthusiastic about the integrated oil companies that produce, refine and sell, providing them with some cushioning when oil prices drop. Money still flowing into trusts Regardless of these warning flags, money is still flowing into the trusts, prompting four more companies — Progress, NAV Energy, Zargon and Espirit — to join the ranks this year.
Whether Penn West joins that movement and creates what could be the biggest trust of any kind in Canada has become the year’s hottest topic of speculation.
Company President Bill Andrew kept his thinking under tight wraps Aug. 6 when Penn West released its second-quarter results, which showed a sharp drop in earnings to C$65.5 million from C$192.5 million a year earlier, when a favorable tax ruling and foreign exchange gains gave a sharp lift to results.
Andrew would only say that until a recommendation is made to shareholders Aug. 20 “it is my intention not to discuss any details regarding the strategic review process.” Many trusts reducing cash dividends In the meantime, many trusts have quietly shifted their strategy, lowering their cash dividends to 70 percent of cash flow from the traditional 90 percent or more, reducing the need to borrow and creating a reserve to maintain distributions if cash flow tapers off.
As well, more trusts are breaking with the past and starting to drill for new reserves rather than just buying at premium prices and exploiting the assets.
By offering a growth component through exploration, the trusts are also seen as improving their market appeal.
Meanwhile, the Alberta government is taking steps to ensure that trust investors are better protected.
Revenue Minister Greg Melchin told the Edmonton Journal the province feels it has a duty to remove the risk of trust unit holders being held legally liable for any wrongdoing by trusts.
Although there has yet to be a court case, Melchin said Alberta wants to “remove the uncertainties,” at a time when about half of the 150 trusts listed on the Toronto Stock Exchange are based in Alberta.
He said all the questions related to corporate and securities acts must be reflected in income trusts, covering such matters as registration, insider trading, roles of trustees, directors and officers, appointment of auditors and voting rights.
Alberta has already introduced the Income Trusts Liability Act, which limits the liability of investors to the amount of their investment.
Melchin expects the next phase will fine tune that legislation, depending on the responses from stakeholders by a Sept. 30 deadline.
| 